TRADING TECHNOLOGY
house experience and technical infra- risk managers is likely to be high because of the unfamiliarity of
structure that can be brought to the these applications and the lack of human intervention in a fully
energy markets. Key European markets automated solution. When a solution is directly market-facing and
do not currently appear to be signifi- has multiple interfaces with key internal processes and systems,
cantly affected by the banks’ head including scheduling and risk reporting applications, care must be
start.Butwithgreatermarketliberalisa- taken to ensure that all elements of the new application are fully
tion and liquidity, it seems clear that understood and rigorously tested.
this state of affairs will not persist for Therearealsobehaviouralriskstoconsider.Whenplacingordersin
too much longer. an automated application, traders must be clear about the behav-
iour of those orders once they have been entered, and how those
The Relationship Between Algo & orders will affect their manually managed positions and trades.
Auto Trading Unless the chosen solution is straightforward and transparent in its
The terms ‘automated trading’ or management of orders, there is a risk that its users will fail to man-
‘programmatic trading’ can be applied age their trading activity correctly.
to any execution of a trade without An algorithmic solution, in isolation, creates fewer operational risks
manual intervention. The technology caused by unexpected behaviour of the application, since it is not
that supports automated trading is specifically market-facing. But the potential complexity of the ana-
generally an application that can lytics and data involved does necessitate greater analysis of its out-
accept market instructions of several put. Any set of algorithmic logic must be heavily regression-tested
types: Open orders with no expiry on the understanding that even testing against historical data can-
date/time, ‘fill-or-kill’ orders, or more not capture future risk perfectly. Nonetheless, it is fair to say that
complex instructions, such as those incorporating an algorithmic trading solution is potentially more
with limited windows or multiple inter- risky than solo automated trading only if it also includes automatic
dependent orders. deal execution.
In contrast, algorithmic trading
applies to the more complex analytics
Automated and algorithmic trading technology
that process live market data and run cannot replace the trading strategies that are the
routines of varying sophistication to
traders’ unique skills and resources
determine the trading action that
should be taken. These algorithms fre- Additionally, concerns about how the technology will be used, as
quently attempt to identify market well as the quality of the implementation should also be addressed.
trends and behaviour that are hidden An automated and/or algorithmic application should be, first and
from a cursory view, and can be partic- foremost,consideredatrader’stool,ratherthananewkindoftrader.
ularly helpful in monitoring markets Automated and algorithmic trading technology cannot replace the
that perhaps are not treated as ‘core’ trading strategies that are the traders’ unique skills and resources.
by a trading organisation. They may Instead, where these solutions successfully handle deal execution
also enable the detection of strategies and manage live data, the natural result should be more time for
from competitors by tracking trading traderstostudy,analyseanddescribethemarket.Oncethismessage
behaviour over a period of time and canbeverifiedbythetradersthemselves, one wouldexpect thatcon-
identifying corresponding trends. cerns about the role of a new solution will be largely alleviated.
In other words, algorithmic trading
attemptstodefinewhatshouldbetrad- Technology Selection & Implementation
ed, whereas an automated solution What kind of solutions would initially best suit energy companies
enables the trade to be executed with- looking at adopting automated or algorithmic trading? As far as
out unnecessary pause, such as that automated trading is concerned, systems that offer time-limited
required by human intervention. In a ordersforrelativelysmallvalues–foramaximumamountofvolume
sense, automated trading is an exten- and/or deals per day, for example – would assist in reducing manual
sion of existing straight-through-pro- effort for standardised trade types. Straight-through-processing
cessing techniques for middle and back should be used to minimise the impact on other business processes,
office, while algorithmic trading is a andcouldproveausefuldefinitionoftradedproducttosupport.The
realisation of trading strategies that key is to adopt a modest scale initially in order to develop a robust,
might otherwise be managed in transparent and well-communicated set of tools for traders to use.
spreadsheets or even in traders’ heads. When considering the opportunities for a limited, initial implemen-
tation of an algorithmic solution, vertically-integrated organisations
The Challenges of Introducing may find most value in the use of a series of basic Volume Weighted
New Technology Average Price (VWAP) strategies. These place a position in the mar-
The implementation process for auto- ket, using time slices dictated by average market-traded volume per
mated trading systems should be care- period, and ensure a reduction in market-moving effects as well as
fully examined. Scrutiny from internal concealing the overall position being managed from other market
58 SEPTEMBER 2008 COMMODITIES NOW
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102